The recent volatility in the stock market has everyone a bit uneasy – even folks who have worked with a trusted financial adviser for years. But if you’ve never worked with an adviser before, you may be surprised to find that one of the first things he or she will do is ask you to fill out a risk analysis questionnaire. This questionnaire is designed to help you understand your financial decisions and the process of making decisions. It’s all tied to your personality, your own unique world-view.
Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – that should be understood at the outset. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will help shape every decision you make about money now and in the future.
The most important thing a risk analysis questionnaire can tell is what’s important about money to you. Trained financial advisers can determine your money personality through a process of questioning discovery. Planners can then guide investors within their money personality. Do you want certainty? Are you willing to take a little risk or let it roll because long-term results are more important than short-term volatility? Or will you take more risks with your money because you can always make more of it?
A financial planner tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:
- What’s important about money to me?
- What do I do with my money? What do I plan to do with my savings?
- If money was absolutely not an issue, what would I do with my life?
- Has the way I’ve made my money – through work, marriage, windfall – affected the way I think about money in a particular way?
- How much debt do I have, what kinds of debt, and how do I feel about it?
- Am I more concerned about maintaining the value of my initial investment or making a profit from it?
- Am I willing to give up that stability for the chance at long-term growth?
- What am I most likely to enjoy spending money on?
- How would I feel if the value of my investment dropped minimally for several months? How about significantly over several months? What is a significant drop in value to me?
- How would I feel if the value of my investment dropped minimally or stayed constant (no growth) for several years?
- If I had to list three things I really wanted to do with my money, what would they be?
- What does retirement mean to me? Does it mean quitting work entirely and doing whatever I want to do or working in a new career full- or part-time? Or would I take on volunteer work in retirement?
- Do I want kids? Do I understand the financial commitment?
- If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to help with paying for their college education?
- How’s my health and my health insurance coverage?
- What kind of physical and financial shape are my parents in? Are they enjoying retirement, and what does retirement look like for them?
One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting plan – from investments to insurance, savings to estate plans – should feel like a perfect fit for you.